Monthly Archives: January 2015

Muni Credit News January 29, 2015

Joseph Krist

Municipal Credit Consultant


This week, the Obama Administration announced that it was dropping its proposal  to change the 529 college savings plans held by millions of families. In his State of the Union address, the change was proposed as part of the President’s plan to simplify the tax code and help the middle class. The change would have eliminated  one of the 529 plan’s most attractive benefits: Money could no longer be withdrawn tax-free. (The new rules would have applied only to new contributions.) The money can continue to be withdrawn without payment of capital gains taxes as long as the proceeds are used for education expenses. Many states provide state income tax deductions for contributions as well.

Some say 529 plans disproportionately benefit the most affluent families, which can afford to save. More than 12 million accounts are in circulation, according to Strategic Insight, an investment consultant that tracks the industry. The Federal Reserve’s Survey of Consumer Finances, said that more than 70 percent of the account balances for 529 plans and another option known as Coverdell Education Savings Accounts are held by families with incomes over $200,000. (Those figures also include health savings accounts, but still provide a reasonable best estimate, the administration said.) A report from the Government Accountability Office found that a small percentage of families use 529 plans and Coverdell accounts and that their median income is three times the median income of families without the accounts.

The proposed changes — which were widely opposed in a Republican-controlled Congress — would have discouraged savers from using the accounts because the withdrawals would be taxed as ordinary income. As ordinary income it is also likely to reduce how much they may receive in federal financial aid. The average value of a 529 account is $19,774, according to Strategic Insight, while it estimates the average contribution to accounts that receive regular electronic contributions is about $175 a month.

A partial offset to expand and make permanent the American Opportunity Tax Credit, a credit for qualified education expenses for the first four years of higher education will still be pursued by the Administration. The maximum credit is $2,500, and phases out for married people filing joint returns who earn $160,000 to $180,000 and for single people earning $80,000 to $90,000. Forty percent of the credit is refundable, with a maximum of $1,000, which means that those who have no federal tax liability will still receive money back. The Obama plan would increase the refundable portion to a flat $1,500 and make it available for up to five years, as well as extend part of the break to part-time students.


Gov. Chris Christie signed an executive order appointing Kevin Lavin as emergency manager for Atlantic City. He also appointed Kevyn Orr, most recently the emergency manager of Detroit as a special adviser to the emergency manager. According to the Governor’s announcement of the executive order, Mr. Lavin has extensive credentials in restructuring both private and public underperforming entities, most recently as the leader of FTI Consulting’s Global Restructuring business unit. Mr. Lavin has played a key role in the turnaround or restructuring of over 150 companies around the globe and across a broad range of industries and has served in interim management roles as CEO, COO and CFO.

The Executive Order was in response to a recommendation of the Governor’s Advisory Commission on New Jersey Gaming, Sports and Entertainment that an “Emergency Manager” should be appointed immediately with extraordinary supervisory powers under the Local Government Supervision Act (legislative action may be required to augment the existing Statute). Initial recommendations of the Commission include: (i) tax reform; (ii) school reform; (iii) pension reform; (iv) regionalization or privatization / reduction of certain public services; and, (v) redirecting Atlantic City Alliance funding.

The City faces a number of hurdles. Total Atlantic City gaming resort revenues have fallen by a CAGR of -7.5% since 2006. Four properties (Atlantic Club, Showboat, Revel, Trump Plaza) closed in 2014. Property taxes represent over 81% of Atlantic City revenues in FY 2014, the Municipal tax rate is 1.75%, over 100 bps higher than the statewide average, and Total Property Assessment could be as low as $6.5 billion according to data from recent tax appeal rulings. Concurrently, Atlantic City municipal appropriations, less grants and the dedicated library tax levy, grew by a CAGR of 4.3% from 2006 – 2014. Departmental Appropriations (Police, Fire, Health and Human Services) grew by a CAGR of 0.8%, while non-departmental (pension, healthcare, debt service, bulk purchases, etc.) appropriations grew by a staggering 7.9% CAGR over this period.

The Commission also recommended that Atlantic City has upcoming pension payments of $22.8M in 2014, $23.2M in 2015 and $25.1M in 2016 and that the State should defer these payments for a period of up to three years to help balance the budget in the short term while other recommendations are being implemented.

While the City’s problems may be obvious, the solutions are not nor is the support for the proposed intervention at either the local or state levels. Many argue that additional legislative action is needed to enable the emergency manager to function as fully as the Governor envisions.


New York Governor Andrew Cuomo proposed a $141.6 billion budget that would provide tax breaks for middle-class property owners and small businesses, and boost spending on rail and road projects. The fiscal 2016 spending plan was announced during Cuomo’s fifth State of the State address. It would raise spending by 2.8 percent according to documents provided by his office. The governor also seeks to set aside an $850 million share of a $5 billion surplus from legal settlements with banks for a reserve fund. New York is projected to end the current fiscal year on March 31 with a $525 million operating surplus.

Cuomo also wants to increase the number of charter schools allowed under state law to 560 from 460. He also wants to extend mayoral control of New York City’s schools beyond its 2015 expiration while allowing other cities to apply for the same power. Other proposals include raising the minimum wage to $10.50 an hour ($11.50 in New York City) from $8.75 and spending $450 million to build a train to LaGuardia Airport.

The budget would use a record $5 billion surplus from legal settlements with banks on a $1.5 billion economic development competition for seven upstate regions, $1.3 billion on the Thruway Authority and the Tappan Zee Bridge, and $500 million to bring high-speed Internet to rural areas. An additional $250 million from the surplus would be spent to help extend a Metro North commuter rail line to Manhattan’s Penn Station and provide $400 million to support debt restructuring and projects at rural hospitals, according to the documents. Also proposed was a $1.7 billion property-tax break for middle-class New Yorkers and a plan to lower the net income tax rate for 42,000 business to 2.5 percent from 6.5 percent by 2018, the lowest since 1917.


Last week’s announcement that The Charlotte City Council in North Carolina has voted for an agreement to forgive more than $22 million in debt from the NASCAR Hall of Fame was not a surprise to high yield credit analysts. The bond issue is but one more example of a credit based on specialty facility admission charges that failed due to attendance shortfalls.

As has been the case with so many other museum and “amusement” type credits, attendance and revenues fell short of projections. In the case of this facility, attendance has been far less than expected. The hall was expected to attract about 400,000 visitors each year. Last year attendance was about 170,000.

All of the major stakeholders in the project lost. It is reported that Charlotte will pay Bank of America and Wells Fargo $5 million. They will write off nearly $18 million in debt. NASCAR will give up more than $3 million in royalties that it has been owed since the hall opened in 2010. The hall of fame has not been able to pay the royalties because it has lost more than $1 million each year.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Muni Credit News January 22, 2015

Joseph Krist

Municipal Credit Consultant


While it is widely expected that Puerto Rico’s electric utility will soon default, Standard & Poor’s revised its outlook on Virgin Islands Water & Power Authority’s (WAPA) electric system revenue bonds to stable from negative. At the same time, S&P affirmed its BBB- senior-lien rating and its BB+ subordinate debt ratings on the bonds. S&P said that “the outlook revision reflects our view of the improved competitive position from recent rate cuts and the progress that the authority has made in diversifying its outlook for energy costs.”

WAPA has reduced oil dependence in its generating fleet by converting two plants to burn propane, improved efficiency at its plants and in its distribution network, and adding renewable energy sources, such as solar power. Fuel accounted for 72% of fiscal 2014 operating expenditures which is actually slightly lower than in recent years. Generally high oil prices have stressed the authority’s financial performance, due to the lag in recovering fuel costs quickly from electric customers. Failure to recover fully and timely fuel costs affected debt service coverage. The recent decline in oil prices has improved WAPA’s cost profile.

The stable outlook is based on a view that while rates remain high, the recent drop-off in levelized energy adjustment clause rates and improved competitive position will be favorable for collections and electricity demand. Given the decline in oil prices and the expected drop in the authority’s exposure to oil price swings, near-term financial pressures are set to moderate. However, if the economic or oil price situations weaken, there could be downward pressure on the rating or outlook. Because of the system’s high debt burden, rates, and receivable balances, it is not expected that the rating will be upgraded in the next year.


Amendments to legislation increasing the petroleum-products tax, known locally as la crudita, which would authorize a bond deal of nearly $3 billion and passage of a sweeping tax reform, are at the top of the agenda for Puerto Rico. Officials and legislative leaders have dampened expectations of swift passage of both measures, with Gov. Alejandro García Padilla saying tax reform would be introduced by mid-February, with an eye to passage by March 31, and Senate President Eduardo Bhatia insisted that the upper chamber wouldn’t rush its consideration of sweeping tax reform.

The legislation raising the petroleum-tax hike and authorizing a $2.95 billion bond issue was approved in a special session in December. However, to win enough support, the final version of the legislation “imposed conditions that will delay and may even prevent the [bond] issuance,” said Moody’s at the time of passage. Those include making the petroleum-tax increase contingent on implementation of a broad tax overhaul. Another condition nixed a provision for annual inflation adjustments to the tax, while a third limits borrowing costs on bonds backed by the new tax revenue, capping the coupon at 8.5% and requiring a minimum issue price of 93 cents on the dollar.

Government estimates of how much the petroleum tax raised in fiscal 2014, which ended June 30, have fluctuated greatly from $255.5 million to $661.9 million, according to an NCM Noticias report. These estimates were made after the administration tripled the petroleum tax from $3 a barrel to $9.25 a barrel. In terms of revenue collected, the peak was in 1999 when $406 million was collected from the petroleum tax, with the low point dropping to $264 million in fiscal 2013.

The legislation was approved by only a single vote in both the House and Senate and changing the language could alienate swing votes. Many analysts still expect the measure to pass, given its importance in shoring up Government Development Bank (GDB) finances. The bond issue would repay $2.2 billion of principal and interest on loans the GDB provided to the Puerto Rico Highways & Transportation Authority (HTA). The legislation would transfer the GDB’s $2.2 billion loan to the HTA to the Puerto Rico Infrastructure Financing Authority (AFI by its Spanish acronym), along with the means to pay for it through revenue produced by increases in the petroleum tax. The bill also provides extra funding to cover operational budget gaps at the HTA, including its mass-transit assets that are being spun off into a new public corporation.

On paper, Puerto Rico has enough money to make it through the end of fiscal 2015, which ends June 30, but officials say boosting GDB liquidity is essential so that Puerto Rico can use the extra cash to plug any fiscal holes in this year’s budget and cover other emergency situations. If not amended, some think that the GDB could be forced to write off more than $2 billion of HTA loans, risking the possibility that the GDB’s auditors could determine the bank insolvent. More importantly, the GDB would be unable to cover potential central government and public corporation deficits, triggering a potential cash-flow crisis.

While the tax-reform proposal details are being kept under wraps, it is rumored  to exempt from income taxes those earning $35,000 a year or less, while making up for the lost revenue with a value-added tax (VAT) of about 15%, which would be levied on food, medicine and other items currently exempt from the 7% sales & use tax. Tax reform is also expected to overturn the gross receipts tax and increase property taxes.

There are significant risks entailed with the implementation of a VAT, which would be the only such tax in the U.S. The transition to such a tax would be challenging in the best of times. PR has a mixed record of implementing tax changes and there is a culture of evasion on the island.


Gov. Sam Brownback, who made cutting taxes and shrinking government the centerpieces of his government, proposed last week to close a huge projected shortfall in the state budget by increasing some sales taxes and sharply slowing his plan to gradually reduce the state income tax. The move marks a significant turn for Mr. Brownback, who has tried to make his state a national model for conservative governance and who criticized calls from his opponent in last year’s campaign to scale back his income tax cut.

“I’d rather speed it up,” he said of his income tax cut. “But what we’re trying to do is balance the obligations we have as a state.” Mr. Brownback’s allies said the budget proposal represented necessary modifications that would keep alive the goal of someday eliminating the income tax, but opponents painted the plan as tacit acknowledgment of their longstanding argument that his policies were damaging the state’s finances.

Even some lawmakers who generally align philosophically with Mr. Brownback, who started his second term this month, seemed wary of parts of his proposal. Republicans control the Legislature. “He’s proposed some revenue enhancements that I think the Legislature will have a great difficulty passing,” said Senator Susan Wagle, the chamber’s Republican president. “That’s tax increase.” In 2012 and 2013, the governor championed and the Legislature passed the largest tax cuts in state history, eliminating taxes on non-wage earnings for nearly 200,000 small businesses and starting to phase in a series of cuts on individual income taxes.

The enacted income tax cut dropped rates this year to 4.6 percent on the top end and 2.7 percent on the low end. The lower rate was set to drop to 2.4 percent next year, but under the new budget proposal, it would fall only to 2.66 percent, while the higher rate would remain at 4.6 percent. By 2018, the higher rate was supposed to dip to 3.9 percent, and the lower to 2.3 percent. But under the governor’s new proposal, the rates would remain at 2.66 percent and 4.6 percent. The governor’s plan includes a mechanism for continuing the income tax decreases if revenue rises.

If revenue grows to 103 percent of the previous year’s amount, the plan calls for placing the additional revenue into a fund that the Legislature could use to implement more income tax reductions. The plan also creates a budget stabilization fund that would use revenue growth to fill deficits. The Governor also has asked lawmakers to begin reducing itemized deductions this year — those reductions were supposed to start in 2017 — and to increase sales taxes on liquor and tobacco products. Those changes, along with a tax amnesty for delinquent payers, would increase revenue by more than $423 million over the next two fiscal years, according to the governor’s estimates.

The big expenses in the state’s budget of more than $6 billion are pensions, Medicaid and K-12 education. With the deficit estimated at $650 million for the fiscal year beginning in July, Gov. Brownback proposed overhauling how each of those areas was funded. He called on lawmakers to rewrite the school funding formula, which has been the subject of a hotly debated lawsuit that has bounced around the state’s court system. While lawmakers contemplate how to rewrite the formula, the governor has suggested funding the schools over the next two fiscal years with block grants rather than through the traditional method. This has raised concern among some school advocates about whether districts would be shortchanged.


Gov. Jay Inslee, a Democrat, has called for the biggest increase in new tax dollars in state history. “The time of recession and hollowing out is behind us,” Mr. Inslee said in his State of the State address to lawmakers. “It is now time for reinvestment.” Mr. Inslee is seeking $1.4 billion in new revenue as part of a nearly $39 billion budget plan that includes a new capital gains tax on the wealthy and a cap-and-trade carbon tax system he said would also reduce climate-altering pollution.

The extra money, along with a projected $3 billion increase in revenue from existing taxes in a recovering economy, would be funneled heavily to one line item: education. This is in response to a decision of the Washington Supreme Court, which last fall found the state in contempt for failing to outline a schedule, in dates and dollar amounts, to remedy years of underfunding of schools. The justices issued a contempt order in September, after many failed promises by the Legislature, but held off enforcement until the end of the 2015 legislative session, which began last Monday and is to last for 105 days.

The imposition of a penalty, if it comes to that, could well be a first in American politics. Legal scholars could not cite another example of a state high court holding an equal branch of government in contempt. No one is certain what might happen. The court was vague about what it might do, leaving just about anything on the table, and there is no  relevant precedent. The court could, for example, order money deposited from state general funds into school accounts, legal scholars have said, or impose fines or do something else altogether.

Because the federal courts do not police disputes between branches of state government over the separation of powers, any challenge to the court’s action could be appealed to only the justices themselves, who would be asked to second-guess whether they had acted within constitutional bounds.  The Legislature is divided and less than 24 hours before the governor’s speech, the Senate changed its own rules to make any new tax harder to pass — requiring two-thirds approval of the chamber instead of a simple majority.

Gov. Inslee’s tax package would be the largest ever in dollar terms, but in terms of percentage increase, some tax hikes have been much bigger. Court orders on education are common in state politics. Particularly since the 1990s, lawsuits have focused on state constitutions, which vary greatly in their requirements for education. Sixteen states, for example, simply require a system of free public schools, according to the National Conference of State Legislatures. Washington’s constitution is one of the most stringent — one of only eight that call education a “fundamental,” “primary” or “paramount” state obligation. Some lawmakers say an increase in the range of $1 billion to $2 billion in the current budget would meet the court’s demands, while others cited higher or lower numbers.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Muni Credit News January 15, 2015

Joseph Krist

Municipal Credit Consultant


Before Gov. Bruce Rauner could even officially begin his term, the games have begun in Illinois. The Illinois General Assembly approved legislation last week establishing a special election in two years’ time for state comptroller in a move that clearly defies the wishes of the Gov.-elect. The Senate approved the measure by a 37-15 vote, with the House voting 66-40.  The move is the first indicator of the partisan divide that overhangs Illinois as it attempts to deal with its financial and pension predicament. Democrats said the legislation was in the spirit of democracy and good government, while Republicans called it a political power grab.

Rauner’s spokesman released a statement saying Democrats in the General Assembly “refused to take bipartisan steps” and “proceeded instead with a constitutionally dubious election bill.”  Outgoing Gov. Quinn had called a special session following Republican comptroller Judy Baar Topinka’s death in early December. Topinka was reelected to a second term in November, but died six weeks before taking the oath. A legal opinion from Attorney General Lisa Madigan determined that Quinn could appoint a replacement to serve until Jan. 12, when the current term expired, but that Rauner could name someone to serve the upcoming term.

In addition to the comptroller position, the bill also would apply to other vacancies that might occur in statewide constitutional offices going forward, except the governor’s office. Still, Republicans complained the move was designed to strip Rauner of his executive authority and an attempt to better place Democrats for the post in 2016. They also called it a purely partisan maneuver with one GOP state Sen. saying approval of the legislation “sets a new day in Springfield off on a disappointing foot. It poisons the well.”


Governor Edmund G. Brown Jr.  proposed a budget last week that injects billions of dollars more into schools and health care coverage, holds college tuition steady and delivers on Propositions 1 and 2 by investing in long overdue water projects and saving money, while continuing to chip away at the state’s other long-term liabilities – debt, infrastructure, retiree health care and climate change.  “This carefully balanced budget builds for the future by saving money, paying down debt and investing in our state’s core needs,” said Governor Brown. “Our long-term fiscal health depends on the wise and prudent actions we take today.”

When Governor Brown took office in 2011, the state faced a $26.6 billion budget deficit and estimated annual shortfalls of roughly $20 billion. Since then, the state has eliminated these deficits with billions of dollars in cuts, an improving economy and new temporary revenue approved by California voters.

The Budget includes the first $532 million in expenditures from the Proposition 1 water bond to continue the implementation of the Water Action Plan, the administration’s five-year roadmap towards sustainable water management. Additionally, the Budget includes the last $1.1 billion in spending from the 2006 flood bond to bolster the state’s protection from floods. It also proposes $1 billion in cap-and-trade expenditures for the state’s continuing investments in low-carbon transportation, sustainable communities, energy efficiency, urban forests and high-speed rail.
Under the Budget, the state’s Rainy Day Fund plans for a total balance of $2.8 billion by the end of the fiscal year. The Budget spends an additional $1.2 billion from Proposition 2 funds on paying off loans from special funds and past liabilities from Proposition 98. In addition, the Budget repays the remaining $1 billion in deferrals to schools and community colleges, makes the last payment on the $15 billion in Economic Recovery Bonds that was borrowed to cover budget deficits from as far back as 2002 and repays local governments $533 million in mandate reimbursements.

In positive credit news for local school districts, K-12 school funding levels will increase by more than $2,600 per student in 2015-16 over 2011-12 levels. This reinvestment provides the opportunity to continue implementation of the Local Control Funding Formula. Rising state revenues mean that the state can continue implementing the formula well ahead of schedule. When the formula was adopted in 2013-14, funding was expected to be $47 billion in 2015-16. The Budget provides almost $4 billion more – with the formula instead allocating $50.7 billion this coming year.

University tuition almost doubled during the recession. The Budget commits $762 million to each of the university systems that is directly attributable to the passage of Proposition 30. This increased funding is provided contingent on tuition remaining flat. All cost containment strategies must be explored before asking for higher tuition.

Due principally to the implementation of federal health care reform, Medi-Cal caseload has increased from 7.9 million in 2012-13 to an estimated 12.2 million this coming year. The program now covers 32 percent of the state’s population. The state’s unfunded liability for retiree health care benefits is currently estimated at $72 billion. State health care benefits for retired employees remain one of the fastest growing areas of the state budget: in 2001, retiree health benefits made up 0.6 percent of the General Fund budget ($458 million) but today absorb 1.6 percent ($1.9 billion). Without action, the state’s unfunded liability will grow to $100 billion by 2020-21 and $300 billion by 2047-48. The Budget proposes a plan to make these benefits more affordable by adopting various measures to lower the growth in premium costs. The Budget calls for the state and its employees to share equally in the prefunding of retiree health benefits, to be phased in as labor contracts come up for renewal. Under this plan, investment returns will help pay for future benefits, just as with the state’s pension plans, to eventually eliminate the unfunded liability by 2044-45. Over the next 50 years, this approach is estimated to save nearly $200 billion.


Last week the Municipal Analyst Group of NY (MAGNY) held a discussion on the meaning and impacts of the Detroit bankruptcy now that the final opinions have been issued as of yearend. The panel assembled included advisors to the bankruptcy judge, a bond insurer, and holders of the City’s pension COPs. A few key takeaways from the meeting are as follows. The consensus is that the pace and results of the bankruptcy resulted from its relative speed. The pace seemed to be driven by politics – the politics of the 2014 gubernatorial election, a possible desire for higher office on the part of the Governor, and fears as to reliance upon the political infrastructure of the City.

The plan of adjustment that resulted – especially its reliance on the Grand Bargain for funding pensions – was cited as an outlier relative to other Chapter 9 proceedings. The fact that the City’s best asset in terms of monetary value – the art collection at the DIA – was effectively ring fenced throughout the negotiations between the City and its creditors contrasts with the actions of many other municipalities facing insolvency or bankruptcy. The sale of assets by Allentown and Harrisburg, PA were specifically noted as contrasting with the lack of asset sales by the City.

The result is that the plan of adjustment only had a real impact on the City’s balance sheet. It did not truly address the City’s operating culture or resources over the long term. This concerned many analysts as the process unfolded as it is clear that a mere reduction in the City’s debt payment obligations was insufficient to deal with its long term operating and economic issues. A good example is the City’s well documented problem with blighted properties.

With nearly 85,000 such properties, the City faces a herculean task to address these conditions and provide a more realistic footprint for the City. This will impact the scope of infrastructure restoration, the ability to develop new resources whether for economic or residential development, and has real impacts both current and long-term on the scope of the City’s operating demands and resources. As an example, over 50% of police and fire incidents responded to involve these properties. Current budgeted resources are clearly insufficient to address the current state of these parcels.

The net result is that on many levels, the bankruptcy has many negative implications for tax backed bondholders across the municipal market. The relative standing of pensioners relative to debt holders in favor of pensions was reinforced while the value of a voter approved debt issuance and tax pledge was effectively limited. In addition, the failure to meaningfully address long-term operations meant that bond holders will continue to be subject to many of the same risks that led to the bankruptcy in the first place. These include dysfunctional politics, inefficient operations, a weak economy, and a poor environment to support future economic growth. Each of these issues are strikes against the bondholder.


Gov. Rick Snyder of Michigan appointed a new emergency manager on Tuesday for the Detroit Public Schools, the fourth since 2009. About 47,000 students in kindergarten through high school attend Detroit’s 97 schools now, compared with 96,000 in existing schools in 2009.  In 2009, the school system had a $327 million deficit; this year the deficit was estimated at $169.5 million. The intent of Michigan’s emergency manager law has always been to quickly move cities and schools systems out of financial distress and back on their own, but Mr. Snyder said the problems in the school system were so great that an emergency manager must remain. The term of the current EM was due to run out so a replacement had to be named. He is was the emergency manager for the city of Flint, and he worked as Saginaw’s city manager before that. The Governor has ruled out bankruptcy for the Detroit Public Schools, a distinct legal and financial entity from the City of Detroit.


Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Muni Credit News January 8, 2015

Joseph Krist

Municipal Credit Consultant


For many municipal market participants, 2014 turned out to be a good year in the end, although that’s not the way it looked at this time last year. At the  beginning of the year most market participants didn’t expect to see anything more in the way of returns than the average coupon. Weak supply however, was overtaken by basic demand. While Detroit’s bankruptcy dominated the news, the large Puerto Rico bond issue ($3.5 billion of general obligation bonds on March 11) came to market and then traded up. The junk-rated bonds were priced with an 8% coupon to yield 8.727% in 2035 and saw strong demand from investors.

Continued growth in the economy and lower oil prices provide a favorable base for many credits in the near term. Sales tax, utility, and transportation credits based on demand and utilization should broadly benefit. General tax backed credits should also be in better shape as an improved economy supports budgets. There are of course exceptions. The State of Illinois continues to face its ongoing pension deficit problem. Kansas continues to face significant deficit problems as the result of its policy of slashing income taxes through both rate and base reductions. While not a GO issuer, other credits (primarily for highways) supported by dedicated taxes are under pressure from the need to transfer funds to fill the state’s revenue shortfall.

Another transportation credit that will face headwinds is the NY State Thruway Authority. Management is under fire with the resignation of the top two executives under pressure from a looming investigative report and funding issues related to the Tappan Zee replacement project. Another NY transportation issuer facing controversy is the Port Authority of NY/NJ. At the end of December, their Legislatures already adjourned, Governors Cuomo of New York and Christie of New Jersey, vetoed a bill that would have reformed the agency. The governors, who jointly control the bi-state Authority, then released a report of their own calling for changes. Among the proposals was one considering the elimination of service between 1 a.m. and 5 a.m. on the Port Authority Trans-Hudson, known as PATH. The Port Authority chairman, John J. Degnan, who helped write the governors’ report, has since stated that stopping overnight service is one of at least six proposals for improving the finances of the PATH system. Eliminating service would save the authority $10 million from its $330 million budget, according to the governors’ report.

Potential demand could come from investors who removed  $60 billion in assets from the muni space in 2013. The 2014 market did not recover all of those assets as investors returned only $21 billion into muni funds, according to Lipper US Fund Flows data.  In 2015, the amount of maturing debt is set to drop to $176 billion from $282 billion data compiled by Bloomberg show. In a sign of potential new supply from  lawmakers for new projects, U.S. states and localities asked voters in November to approve $44 billion of bonds for schools, water systems, hospitals and roads, more than twice what they sought in 2010. Voters approved more than $37 billion of the measures.

One thing unlikely to change is the tax break for municipal bonds, which has been threatened by proposals advanced in Washington during the past four years. The prospect of taxing muni-bond interest has been raised since 2010 as President Obama and congressional Republicans looked to lower the deficit or pay for cuts to income-tax rates. Representative Paul Ryan of Wisconsin, the new chairman of the tax-writing House Ways and Means Committee, has said that focusing on business taxes may represent the best chance for success, given how far apart Obama and Republicans are over how to approach taxes on individuals. That lessens the odds that Congress may alter the status of municipal bonds.

The tax break, forecast to cost the Treasury about $47 billion this year in foregone revenue, has been targeted along with dozens of other provisions in overhauls that failed to advance during the past four years. Governors, legislators and local officials have lobbied Congress to prevent any such change. More than 100 House Democrats and Republicans in 2013 signed a letter supporting the break. At a hearing on the issue in the Ways and Means Committee that year, lawmakers from both parties said taxing munis would push costs onto local governments and taxpayers.

The improving economy has eased the pressure on Congress to reduce the federal budget deficit in the year ended in September, the deficit was $483.4 billion, about a third of the record $1.4 trillion hit in 2009. One potential negative is that if the economy really is as strong as 5%, then investors could anticipate that yields would rise, then munis would underperform.


Elsewhere, New Jersey is giving Atlantic City a $40 million short-term loan so the city won’t have to sell notes in the municipal market, according to a published report. The city had originally planned a $140 million bond sale for November, then scaled it back to a smaller note sale, which was delayed because of concerns about the city’s finances in the wake of the casino closures. The city must repay the 0.75% interest loan by March 31, according to an agreement signed by the city and the state, Reuters reported.


While we were on hiatus, I had a chance to travel through northern CA on the way to and from Yosemite National Park. Along with a great chance to view the wonder that is Yosemite, the trip afforded the chance to see many real examples of the importance of water and the impact of the drought on many CA industries. The trip takes in some 200 miles of rich agricultural land including fruit orchards, cattle ranches, many varieties of nuts, and much valuable timber land. The dependence on reliable fresh water sources could not have been clearer.

The trip also took in the Don Pedro, Cherry Lake, and Hetch Hetchy water storage facilities. The impact of the drought has been well documented by a variety of studies and statistics. In reality, the problem is easy to see.

The white ring just above the surface of the water in the Hetch Hetchy Reservoir represents the shortfall in water stored versus the amount usually stored here for the City of San Francisco. A similar if not greater ring was visible at Don Pedro Lake. In addition, the area had a distinct lack of snow for the time of year. Given the lack of rain and snow, no improvement is expected and that ring is likely to grow in height. It is just one example of what influenced CA voters to support Proposition 1 in November in such large numbers.

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